The Esthers' Transition Path

July 1, 2010 04:13 AM

A wise parent does not prepare the path for the child, but instead prepares the child for the path. That’s the learned perspective of Chet and Lori Esther of Beardstown, Ill., founders of Esther Family Farming Company (EFFCO).

The Esthers spent 30 years raising a family and building a profitable 4,700-acre grain operation, a construction company and a semi truck and trailer dealership. Now the family is eager to begin the journey of transitioning the multiple-entity business to the next generation. The Esther family was selected to be included in the Farm Journal Legacy Project.

At just 51 years old, some might say farm founder Chet Esther is too young to retire. But while continuing his active business-leader life (he currently serves on the board for Growmark Inc., a regional cooperative, and Two Rivers FS, Inc., a local farm service company), he hopes to retire by age 55 and remain a "helpful hired hand."

Chet’s career began in high school, when his dad gave him 13 acres as an FFA project. He and his brother, Joe, each inherited 600 acres when their parents passed away 20 years ago. These acres formed the foundation for EFFCO, which now includes 2,000 acres owned by Chet and his wife, Lori.

Lori has spent the past 30 years raising the family and keeping books for the farm. She recently retired, handing over the book work to a full-time secretary.

Sons Ryan (33) and Chad (30) now live on the farm. Ryan is married to Erin and they have two daughters. Chad and wife Tanya have one young daughter.

SONS COME HOME. At first blush, the succession plan seems straightforward: Use the proper estate planning and succession tools to transfer land and business assets from parents to sons during the next two to five years.

The sticking point is tenure. Chad returned home in 2008 after working as a forester in Missouri. During the eight years Ryan has been home, he and his father started EFFCO, with each owning 50%.

"For Chad to buy in would cost him about $800,000," Chet says. "That’s not really fair to ask, since Ryan didn’t buy in at that level."

However, it is important to recognize Ryan’s time on the farm and the fact that he signed bank loans and took on the risk, says Farm Journal succession planning expert Kevin Spafford.

Ryan wants an equal partnership, and he is willing to let Chad buy in at the level Chet deems fair. "I chose to stay home and I have benefited from using the equipment for my own operation," Ryan says.

"This is a situation where equal may not be fair, and that is the leading issue in succession planning," Spafford says. "We have to find measurements to make an equitable distribution." The Legacy Project team is working to develop a plan to bring Chad in.

Chad struggles—emotionally and financially—with how to rejoin the business. "It’s only fair that I buy into the operation, but it would be difficult given its value today. I know I can help the operation become more efficient and grow," Chad says. "Honestly, I don’t know how to get back into the operation."

"Chad may never catch up to Ryan in terms of ownership percentage, and that’s OK, as long as we make sure he is compensated equitably," Spafford says.

LAND TRANSFER. Another likely issue is that the land is in Chet and Lori’s names. They’re concerned about transferring land without incurring an estate tax burden.

There is also a decision to be made about whether to transfer land into just the sons’ names. For example, if land was in both the sons’ and daughters-inlaw’s names, it would be difficult to keep farm ground in the family in the event of a death or divorce.

This decision is especially difficult for Lori, who well remembers the pain of being treated like an outsider when Chet’s parents transferred land to him and his brother, Joe.

"I knew my name would not be on land passed to Chet, but I would have liked to have been informed about decisions regarding the farm and our future," Lori says.

The first priority when passing on land is to protect ownership interests, Spafford says. "We don’t want to take away from Chet and Lori’s retirement security by transferring too much land. We also don’t want to tie the hands of the next generation."

One option is for Chet and Lori to gift ownership over their lifetime to family members, says Josh Sylvester, a Certified Financial Planner and a member of the Legacy Project team. Sylvester is helping the family design a plan.

Lifetime gifts remove both the gifted property and any subsequent appreciation on that property from the donor’s taxable estate, Sylvester says. The Esthers can also take advantage of the donor’s annual gift tax exclusion and the applicable exclusion amount for lifetime transfers ($1 million) to transfer assets free from gift tax.

"A lifetime gifting program lets the owner transfer ownership gradually," Sylvester adds. "The next generation then can slowly grow into the role of owner."

NEVER TOO LATE TO PLAN. In retrospect, Chet worries he didn’t prepare enough for the coming transition. "We spent the first 30 years trying to get ahead. Now we need to focus on our legacy," he says. "We have wills, but we really haven’t done much planning for the next generation."

Spafford says farmers often feel that succession planning is futile. "There are so many issues, and it is so complicated, with many decisions to be made," he explains. The good news is that by getting some of the big issues, such as transferring land, out of the way, the family can knock out other concerns.

The Family/Company Setup

EFFCO (Esther Family Farming Company)

General partnership; ownership is 50% Chet, 50% Ryan

4,700 total tillable acres—2,000 acres owned by Chet and Lori, balance is rented

"Succession planning gives the next generation security in understanding where they fit in our family business. Even our daughters-in-law have remarked how this process helped them understand the long-term investment in the family farm. "

"The Legacy Project has helped us with one of the most important challenges facing our family business, that of passing it on to the next generation. "

"We’ve learned that everyone can have a shared vision and how to communicate that vision. We are all different people, but now we are moving together to keep the farm in the family. "

"It didn’t take long to figure out how unorganized we were. We had land deeds scattered here and there and sometimes didn’t even know how our land was titled. This process has helped get our business organized. "

The Esthers on TV

Beyond the pages of TOP PRODUCER, you can learn more about the Esthers. In the second episode of Legacy TV, we meet the Beardstown, Ill., family and learn more about their systematic and creative approach to transition. The roundtable features Chet Esther, a father who is doing all he can to make sure his two sons are on solid ground as they assume leadership and ownership roles.

In the third episode, son Ryan Esther participates in a roundtable discussion with financial planner Rafael Ruano. Watch these episodes and others at www.farmjournallegacyproject.com.